How To Suck Your Own Peinus

a break during the summer will be good.

First, stock markets are acting now so completely irrational. In those moments, I watch what I have in portfolio and I ask myself the following questions:

• What are the events that could justify a reduction in value of the title?
• If the price has already dropped, is it rational that the decline?
• Conversely, does an increase is correct?

When I say that markets are irrational, I mean not just that we have suffered declines in recent weeks. Indeed, some titles have been planted with the market and instead mounted. On the other hand, some titles are unrelated to current macroeconomic problems and have suffered a huge drop.

Take the latest results from Research In Motion (RIM). The company announced its results last Thursday. Sales are up 45% from last year, but 2.5% below analysts' expectations. Profits are up 20% from last year ... and 3% above expectations.

So, revenues are growing weaker, but profitability is present. According to the results, the company has sold fewer than anticipated BlackBerry by analysts, which explains the lower income.

Such results are negative? Not according to me ... but the markets have dropped the title of 11%.



So I take a break for the summer. It could be that I write a comment or two, but it should not have many activities here in August.

good summer.

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Break The profitability of financial analysts

After my review of the CFA (which has relatively smoothly), I worked on the completion of my memory and it is that explains the lack of anything for a tip. I'm almost finished and the deposit should be by the end of the month. Since I really learned something interesting during the creation of this memory, I thought I would share with you some relevant information.

Analysts Are Pay?
is the question at $ 100. Is it possible to rely on analysts' recommendations to make money? Can we, by simply reading a report, transact in markets and be a winner. The answer to this question ... ... ... ... ... Theoretically, yes!

I already see many doubters. First, why only in theory? Because we must deal quickly (explained below) and a simple client like you and me did not have access to the findings of analysts quickly. Consider an analyst who files his report at noon. All major clients (institutions, mutual funds, managers, ...) are invited to a conference call to discuss its conclusion at noon. But his report could be available for small investors between closing and opening tonight for tomorrow (for reasons of compliance and quality of language among others). I therefore said that analysts are paid in theory, because small investors lack access to conclusions pretty quickly. And even if you were given such access ... you should be available anytime to receive this information, which is unrealistic.

I can still hear the world tell me they doubt whether even paying for big investors. Well, I must tell you that Analysts, on average, however, are actually paying. Notice I said average, some recommendations will be losers, while others will benefit.

What that analyst recommendations are paying?
The answer to this question is very simple ... what are the updates recommendation. It is known that analysts are biased. It is not in their nature to recommend the sale of a security. However, what matters is not the recommendation as it is (buy, neutral, sales ...), but rather the change. In other words, it must monitor whether the title has just been upgraded or downgraded. That is charges. And when you think about it logically. We are not supposed to do returns with information already known. However, if an analyst with a buy recommendation for 5 years on the title, I think his position is known to the market. Although it decreases this recommendation, it is a new information and research on the subject shows that the price adjustment is not instantaneous.

Today, there is performance to the period of one month following the update recommendation. And if the recommendation is supported by forecasts of earnings (that is to say that in the event of an upgrade, the analyst also increased its profit forecasts and vice versa), then the performance achieved is even greater.

performance may be achievable within one month after the update, but most of it takes place in the first 48 hours. Compromise after 48 hours without interest after the transaction fees paid.


What does this mean for ordinary investor?
For us, the conclusion is simple: do not blindly follow the recommendations of analysts. Even if the recommendation is less old and he is repeating an old recommendation. For the small investor, the interest of an analyst's report from the analysis on the inside, not small conclusions on the first page.

Implement a strategy to recoup the recommendations of analysts is to buy ALL the upgrades and sell short ALL downgrades. According to the results of my memory, it means having about 300 holdings, and deal 40-50 per day. I do not need to explain why, net of transaction costs, such a strategy is not really profitable. Even if we reduced the sample investable is always ± 15% of the sample which is traded at each day. Net of fees, such a portfolio will never be really interesting.

Do not come to the conclusion that the analysts are therefore useless. I told you that on average they are paying, but it should settle quickly if transaction costs prevent us to enjoy. It means rather that financial markets are efficient enough to recognize that the opinion of an analyst to value and prices adjust quickly to the market. To the point where net cost is no more money to be made. The only people who truly benefit from a recommendation from analyst are those who hold the title before the publication of these findings. It why the rules against front-running are important.

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The importance of market timing

After discussing the evaluation of market timing analysts, I thought I would add you a little demonstration to represent the importance of good market timing.

First, remember that many love to say "I expected" or "I told you so" (and I myself am guilty of doing so ... go back to my assessment of the banking system U.S. in early 2009). Is to see who can actually boast that this way of evaluating the predictive ability of analysts is important. Whoever is right most of the time well we can make small "crises of bragging), but when it's been years and you say" you'll see "bad" it's coming "... your ability to market timing is a bit .. . probation. If someone says since 2003 "you'll see, the markets will crash!" it is certain that he will eventually be right. But he has been wrong for several years. The timing is therefore an important concept in preparation for movement. Besides, it's one thing repeated by the CFA ... a prediction time frame without is worth NOTHING! View Dow at 12 000 points says absolutely nothing. When does it reach 12 000? In a month? a year? 25?

The time factor is critical to good recommendations and forecasts. And then I'm not talking about short term market timing . I do not speak to predict whether tomorrow the market will be bullish or bearish. I talk to have good timing in the month, quarter or year. To demonstrate the importance of market timing, I'll redo this a little simple exercise is done in some of my current portfolio management at work to see the interest compounds and better grasp the basic concepts of risk. Take six investors (managers or analysts whatever):

• A: Do not believe in any way the stock markets. They are too expensive and too risky. He therefore prefers to invest only in Treasury bills.
• B: Do not swear by the stock market. Is fully invested at all times.
• C: He has the gift of seeing into the future and knows at the beginning of each month if the market will yield a positive or negative. He buys when the market will be positive and less Treasury bill when it is more profitable investing in the market. We say that C has a perfect market timing.
• D: A good friend C. It follows the same direction as C, but the opportunity to sell short the market when it is negative.
• E: Did not the gift of C. So he decided to chance it invested in the market or Treasury bills. Chance makes it right about 1 to 2 times as much to market. bull and bear. His score in my last post would be 0.
• F: Does as E except that it leaves nothing to chance. His ability to understand markets allows it to make a good prediction 6 times out of 10. His score in my last post would therefore be 0.20.

If every investor had started his career in January 1926 and was completed in December 2003, what would you think their respective returns? How much would $ 1 invested by each? To leave a little suspense, I will give lower results only.

The time period is that I have available. During my data stopped in 2003. You can continue to 2004-2010, but we should see the same thing. I checked and the difference between each portfolio is very stable over time. I'm not talking about the concept of risk here because it is a little catch with the calculation of risk for investors, C and D. But otherwise, E and F is a standard deviation less than B. For fans of methodology, projections of E and F were produced in a Monte Carlo simulation. Well here are the results:



... even lower ...

• $ 1 for Investor A is $ 17.56: annual yield of 3.7%
• $ 1 for Investor B is 2 $ 114.95: annual yield of 9.9%
• $ 1 for Investor C is 21,792,606 728.67 $: annual return of 30.9%
• $ 1 for Investor D is 61 950 641 518 119 $ 856.00: annual return of 50.6%
• Investor E $ 1 worth $ 277.17: annual yield of 7.2%
• $ 1 for Investor $ 654.03 worth 11 F: annual return of 12.1%

I think I can let you draw your own conclusions the usefulness of market timing in our forecasts. Note that for F, it is right 6 times out of 10 is a performance comparable to a normal financial analyst. A very good analyst could achieve a score between 0.4 and 0.6 according to the formula of previous post.